Tuesday, February 02, 2010

Collecting the Crumbs

"If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake."

---Tom Wolfe, Bonfire of the Vanities

I imagine them, this "aggressive set of [art] boutique lenders and financiers," chuckling as their cigar smoke swirls up and around the brandy snifter their white-gloved butler is handing them. They're confident in the legality of their actions. And why shouldn't they be? Only they can afford the kinds of lawyers that such confidence costs.

It's an awful caricature, I know. No one's butler still wears white gloves, do they?

I'm sorry for my uncharitable depiction, but I'm deflated. Here I was so excited about the upcoming exhibition at the gallery (#class, organized by Jennifer Dalton and William Powhida), which is designed, in part, to pick apart the inadequacies of the art market system and hopefully lead to some alternatives that make the system more appealing, and then I realize we're all just children playing Monopoly in a sandbox, pretending we're talking about real money here.

What led me to that conclusion? This article by Kelly Crow in the Wall Street Journal:

When a seller consigns a work to auction, [Asher] Edelman's firm, Art Assure, will pledge to buy the piece if it doesn't sell for an agreed-upon minimum price. In exchange, the seller will pay the firm a fee of about 5% to 10% of the work's guaranteed price.

Unlike the auction houses, Mr. Edelman says he is also willing to stake a vast array of lower-priced objects—a $55,000 Modernist work on paper, say. Auction houses have traditionally focused on guaranteeing their sales' big-ticket lots, which are most likely to be bid up. Mr. Edelman says that smaller-ticket items represent an untapped market—opening up many more potential clients to him—and he expects to profit from the greater volume of works.

Some in the art world say the plan has the potential to lubricate the entire market by convincing more collectors to funnel art into auctions without fear that their pieces will go unsold and lose value. "Businesses like Asher's could be tapping into a new leverage business based on a potential collateral pool worth tens of billions," says Marc Porter, Christie's chairman.

The plan is also creating some controversy in the art world. Auction houses disclose in their catalogs when they've provided a guarantee for a particular work, because they have a stake in its sale—in a sense, they are partial owners. One of the cardinal rules of the auction process is that sellers aren't allowed to bid on their own work, because they could bid up the sale price.

But there is no disclosure process for a work that has been privately guaranteed, and Mr. Edelman says he wouldn't rule out bidding on a work he had guaranteed if a client other than the seller asked him to buy it. Collectors could wind up bidding against him, not realizing that he stands to profit from the piece selling well. Mr. Edelman says that he wouldn't bid up a work simply to inflate the sale price.

Rival lenders say Mr. Edelman should disclose which works he may be staking and also bidding on. Disclosure would help to "keep the playing field even," says Andrew Rose, president of Art Finance Partners, so that collectors know when a rival bidder is also a seller with a vested interest.

Mr. Edelman says his idea is legal, doesn't require any public disclosure and could benefit the entire market by convincing more collectors to trade works.

Hmmm....where to begin?

How about the idea that more of the art-ambivalent market meddling and speculation that got us into this mess is a fool's answer to getting us out of it? How about the notion that encouraging collectors to "trade works" for its own sake is of dubious value to "the entire market" in that it systematically, artificially inflates perceived value, inevitably leading to a bubble, which will eventually see prices succumb to gravity, see collectors take a huge hit on their investments, and see the entire system freeze, again?

It reminds me of this:

Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place.

In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.

I'm not the only one who thinks Edelman is playing with fire here:

Marc-André Renold, the director of the Art-Law Centre at the University of Geneva, says that offering to guarantee works across a range of lower prices and qualities is "a risky venture." To succeed, Mr. Edelman will need a steady supply of cash to cover his bets. And if he has to step in and buy art that he's guaranteed, he'll have to find a way to offload those same pieces in the private marketplace—offering goods that have already been widely shopped.

But don't let the charm of his venture fool you; Edelman is taking no prisoners:

"I used to do options conversions tables as a kid," he says. "So anyone who competes with me on this has to know I'll take it to the razor's edge."

Actually, I lie. He has taken prisoners:

New York–based dealer Asher B. Edelman visited the opening of Art Basel Miami Beach yesterday with 12 U.S. Marshals and police officers, helping the officials pick out paintings to seize at Galerie Gmurzynska's booth as a result of a default judgment stemming from a law suit he filed this summer. Among the paintings acquired in the seizure are works by Yves Klein, Joan Miro, Edgar Degas, and Fernand Leger.

Earlier this year, Edelman and insurance company XL Specialty Insurance Corp filed suit against Zurich-based Gmurzynska, alleging that the gallery damaged a Robert Ryman painting, Courier I (1985), that Edelman had consigned to the gallery for sale at Art Basel Miami Beach in 2007. The court ruled that the plaintiffs were owed $765,000, which Gmurzynska had not yet paid. The seized works will be auctioned to pay the default.

The value of the seized works amount to around $7 million, roughly 10 times the value of the judgment about Gmurzynska, the customary multiple when seizing property. As of press time, it was unclear whether Gmurzynska actually held title to confiscated works.

Not having someone pay for damage they're responsible for is very frustrating, I'll admit, ("Peter R. Stern, a lawyer for Gmurzynska, says that the gallery's insurer had been in the process of disputing the claim for the damage and the gallery didn't know that a court order had been issued for the work in the meantime"), but introducing this level of corporate hardball into the art market will unquestionably change the tone of things, make the entire endeavor feel more like "work" to the financiers and other captains of industry who collect to relax, and possibly have repercussions all the way back into artists' studios. In fact, like the crumb collectors in Wolfe's novel, the only one who seems poised to purely profit in this is Edelman. For everyone else, this repackaging would seem to come with potentially unpleasant strings attached, none the least of which would appear to be the potential for invoking Mr. Edelman's wrath.

Mr. Edelman's idea may be legal, but that doesn't automatically make it a good idea.

10 Comments:

We've been playing with Monopoly money ever since W initiated the first round of bank bailouts, if not since the Nixon Shock.

I know you're not a big fan of the auction houses but I'm unclear about what you think Edelman is doing wrong. We frequently pay third parties to assume risk for us. As for the potential lack of transparency behind auction sales, that normally solves itself as customers flee the uncertainty, hence the proliferation of no-haggle policies at car dealerships to stop that flight. This population at the auction houses, though, seems to have a huge appetetite for opacity and an unassailable tolerance for conflicts of interest (see also Deitch, J. and Jouannou, A.). That's their choice. And as Renold points out, at the end of the day Edelman could get his clock cleaned. It's his money.

What's going on in the rest of the financial world is a different story. There's nothing inherently wrong with mortgage-backed securities, CDOs, or even derivatives in themselves. But as soon as the government moves to offset losses when the bad ones start reflecting their real value (which is what all those bad actors who ruined the economy correctly predicted), it removes the fear that would normally check greed in the wild. If Citibank and AIG were no longer with us, people would run screaming at the mere mention of CDOs, not trying to repackage them as - what are they calling them? - "Re-Remics."

I don't have the background in finance and economics to get inot this, but at what point did letting mortgage-backed securities, CDO's, or derivatives run amok work? They failed miserably when it was clear even the financiers barely understood the mathematical gibberish their math geniuses were cranking out and as far as I can tell, if TARP wasn't implemented, our entire financial institution could have collapsed under the combined weight of the credit-default swaps on the failed mortgage-backed securities and derivatives. If Citibank and AIG were no longer with us, which I wish they weren't for other reasons, I don't think we'd still be operating on the dollar. In the end, there will be governmental oversight, just not from this continent.

Ed,

When you say that were aren't talking about real money, it makes me incredibly sad. While I poked fun at our materials budget for the show, the amounts of money that we deal with in our circle of the art market is far more real to me than Edelman's funny money. What is it about the way Edelman is throwing around his wealth that disturbs you more than say, Broad buying positions of power at major institutions and crowning himself the cultural captain of the US? Is Broad's purpose more 'pure' than making money off the trade of art? I think one has short term implications, while the other could last for generations.

Anyway, most of us in the art world deal with the crumbs, so instead of talking about the crumbs and crying over them, how about we get some fucking cake from the Edelman's of the world. That would require progressive thought.

Why don't we have a table discussion for #class about 'disgusting displays of wealth and other abuses of power'. Would it be hard to get participants for that one? What's Edelman's address?

Franklin, "Nixon Shock" is the reason for Monopoly money. Lots to blame on W for sure, but to connect him with this issue is just hammering too many nails in the coffin. Besides, W was functioning in a bad system that already allowed for deficit spending. A system that began in 1913 with the Federal Reserve Act.

William, I have no economics background either except what I've studied on my own. That said, mortgage-backed securities, CDOs, and derivatives are just financial instruments with an attendant risk attached to them. They're tools, and they're neutral in the way that tools are neutral. You could put together a reasonable, transparent CDO with obvious contents. And the math geniuses were not cranking out gibberish. (On the contrary, the first guys who figured out that something was wrong were the quants.) The math was brilliant, in a way: see the Wired article on David X. Li. But it was applied in a simplistic, credulous manner by brokers who didn't understand it, to create opaque financial products whose success hinged on centrally planned interest rates and implicit government guarantees that became explict when it all hit the fan. Jeffrey Miron up here at Harvard wrote a decent summary of the problems and how TARP is worsening them. Operating on the dollar is no great shakes if the dollar isn't worth anything. As for oversight, obviously there should be some, but we pay for it one way or another. For instance, regulations require insurance policies, which can be taken out on financial products against their failure, to keep cash in reserve to satisfy any potential claim. That's a relatively low-risk, low-return product, so to satisfy the demand for a higher-risk, higher-return product, the credit default swap was invented. I promise you that if you outlaw them, another baroque product will spring into existence. You're better off letting ventures fall to ruin when circumstances call for it. People avoid them naturally that way.

I agree with Anon 4:08 except that W chose to salvage what was left of his reputation than leave office with a string of bank failures. He deserves enormous derision for that cowardly act if not blame for the situation he was operating in.

But it was applied in a simplistic, credulous manner by brokers who didn't understand it, to create opaque financial products whose success hinged on centrally planned interest rates and implicit government guarantees that became explict when it all hit the fan.

That's a generous but fair assessment from what I've read as well. The parallel I've tried to draw isn't that offering guarantees to works that might not get the same sort of feverish interest as high-profile lots at auction is as hard to comprehend like the derivatives or other tools, but that they represent more of the same excess (too many guarantees) that led to the art bubble in the first place and therefore suggesting they're the path out of the current downturn is parallel to banks suggesting the path out of the global economic recessions is the same kind of "opaque financial products whose success hinged on centrally planned interest rates and implicit government guarantees." It's the colloquial definition of foolish.

If artworks were considered commodities this would all be illegal; Edelman would be prohibited from acting as both principal and agent. The same "stalking horses" exist in real estate (like we even need to be reminded)... Caveat emptor!

What AE is doing is selling the collector a Put option on their artwork.

This is a strategy which would be utilized in a market which is near a bottom.

1. Typically the Put contract would be in force for a defined period, in this case until the auction is completed.

2. If the artwork sells, AE keeps the fee (the put premium) PLUS any other fees he is entitled too on the sale.

3. If the artwork fails to sell, the collector exercises the PUT and sells the artwork to AE at the specified price (the put strike) -- Since AE specifies the 'buy in' (strike) price contractually, we must assume it is favorable to him, below the low estimate. SO...a. He gets the artwork at a low ball price.b. He keeps the 5%-10% premium fee.

This is a straight forward transaction which in itself does not seem to be either unethical or illegal. However the potential for later unethical or illegal behavior is enhanced.

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